Policies in Pakistan tend to be abused more than used. And more often than not it's the design of the policy itself that is inherently wanting and short-sighted, which is then cashed in on by those with malafide intentions.
The case in point in recent history is, when the country embarked upon the journey of the so-called 'business friendly economic policies' in 1990s, where the approach was not entirely in-line with ground realities, nor did it deal with the reasons of stagnation that prevailed at that time.
National economic interest and desires of certain business sectors, essentially traders, were assumed to be moving in the same direction. This was a case of grave misperception. The motto of such policies was simplicity in the taxation system, which was a noble cause. However, does simplicity means converting direct taxation into a form of indirect taxation?
In my view, the people who conceived and introduced the presumptive basis of direct taxation did not have complete grasp of the nature of problems; nor the nature, causes and cure of prevalent corruption in the system; nor did they understand the role of certain business segments in promoting and perpetuating corruption.
As a result of this incomplete diagnosis and singular mindset of looking the picture from one angle, the whole structure of direct taxation was demolished and something strange named as 'Presumptive Taxation' was created. Under this system, the amount of sales or value of import and other such figures were 'deemed' to be the basis of determining taxable direct tax on income. This was the most absurd failure of judgement.
There is not a single country where this across-the-board massacre of direct taxation has been made. Our generations to follow will face the effect of this intellectually incorrect approach and all reasonable students of economics and taxation will question the people who created this mess.
This does not mean that the basic issues that led to the introduction of these drastic measures need not be appreciated. But, like many institutions and systems, taxation structure has been spoiled more by policies guided by vested interests and incomplete information, than corruption committed by individuals. After almost 20 years of existence the system has pervaded so much in our psyche that till recently tax experts, including myself in some cases, were a party of Committees that promoted PTR in certain sectors.
This was an act of intellectual dishonesty and still remains so. The PTR is a curse that works like opium for the business classes who are getting away from documentation and are not able to learn to compete with the world where such obnoxious regimes do not work.
In simple words, PTR has taught the businesses that they are not required to maintain asset, income or expenditure records; there will never be an audit of key accounting figures; and there will be no question about the sources behind the rise in such assets.
At the same time, for taxation authorities it was consistently demonstrated that asset records are not relevant and therefore not kept adequately. The Federal Board of Revenue's objective remained confined to achiing a certain amount of tax collection [the holy word 'target'] that has no direct or indirect relationship with taxable income of major sectors of economy.
The system and approach is faulty by its very nature, for while this suits many people, it has long lasting negative impact on the people pf Pakistan at large. Yet, for it prevails and flourishes for a variety of reasons. Twenty years of experience has revealed that 'mafia' like pressure group have emerged which have taken the policymakers and the government as 'hostage', by blackmailing them with constant shortfall in revenue and the risk of a fall in revenue collection if a guaranteed sum is not there.
However, it must be understood that the saturation point has arrived and if we do not get out of this vicious circle as soon as possible our economic sovereignty that has been greatly diluted will be completely finished. We have to realise it ourselves rather than being told or prescribed by the IMF.
PTR in Pakistan is essentially a tool to promote trade versus industry and to provide undue protection to exports that makes them non-competitive in the long run. This system, in effect, serves the purposes of international business interest, rather than the interest of the real stakeholder of the system, which is the common man.
We had a wrong perception and that the prescription of trade and consumerism and the so-called trickledown effect, will resolve the economic problems of this country. PTR has served that interest very well; however, we do not understand that even that absurd system requires certain rules of the game.
With rampant under-invoicing, abuse of Afghan Transit Trade, the abuse of free exchange mechanism, windows for whitening the untaxed money and many other such evils, even this imperfect form of direct taxation in the guise of indirect taxation, leads to a complete failure.
The policymakers must understand that PTR has to be abolished to ensure incremental no growth in tax revenue and equity in the taxation system. We had already started that approach in the middle of 2005; however, it soon followed that we were not able to bear the pressure of the mafias that have emerged in these sectors. The people benefiting from the system including the corrupt taxation officers are few in number and in any rational sense cannot make a nation of 170 million as hostage.
A national consensus should emerge soon with the realisation of the fact that so long as PTR exists there can be no sustainable growth in tax revenue, employment growth and poverty alleviation. The writer is a Partner A F Ferguson & Co and Member Revenue Advisory Council, Government of Pakistan. He can be reached at [email protected]
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